The indices have inched back up to the highs of the day and breadth has turned positive on very light volume, but overall the action is flat. Under the surface there is quite a bit of aggressive speculative action in low-priced stocks. Most notable is the strength in solar energy, but there are other pockets of action.
Speculative action in low-priced stocks is often a sign that the market is frothy and may be close to a top. I find the opposite to be the case. Strong speculative interest in secondary stocks is a change in character that signals that confidence levels are building and the market action is broadening out. That broadening out usually plays out over a long period before running into a market that is pushed too far.
I'm not suggesting that the small-cap action means we are in for an immediate run-up, but it's healthy to see better speculation and it makes me more optimistic about the potential for the market to come back from corrections and consolidations.
My biggest concern is that expectations for earnings may be too high. We have had far more earnings warnings than usual this quarter and the market has been quite unconcerned about it for the most part. That's next week's business, but it is in the back of my mind and keeping me short-term with most of my trades.
I'm looking at a number of small stocks and I'm impressed that they seem to be holding up well. An example of one that I'm adding is Coffee Holding Co. (JVA). Coffee stocks were a hot group back in the spring and I like the earnings numbers on JVA, which has a $0.99 per share earnings estimate for 2012.